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5 Things Target Corporation Wants You to Know

Find out why the retailer was happy to trade lower profitability for accelerated sales growth over the holiday season.

Thanks to a post-holiday-season press release, investors already knew important details about Target's (NYSE:TGT) peak sales period results. But the retailer still had a few surprises for Wall Street in its detailed fourth-quarter report.

In a conference call with analysts, CEO Brian Cornell and his team discussed the strategies that delivered a return to healthy customer traffic growth in 2017. They also outlined their plan to extend that positive momentum, even at the expense of lower overall profitability.

Below are a few highlights from that presentation.

Image source: Getty Images.

Winning market share

Target managed a far better holiday season than the prior-year period, which was marked by a 3% decline in comparable-store sales as customer traffic plunged by 2%. This year, traffic accelerated to a 3% increase, and the boost powered a 3.6% comps gain.

The numbers translated into added market share across each of the retailer's five core merchandising categories, executives said.

Spending money

We're investing in our business and our team to support Target's long-term sustainable growth. -- CFO Cathy Smith

The sales growth didn't come cheap. Target poured resources into many areas of the business, including by boosting wages, remodeling stores, lowering prices, and extending fast, cheap delivery options to more of its online offerings. The retailer was less profitable as a result, with operating income declining by 13% for the full year, down to $4.3 billion.

Using the physical footprint

Shipping from a store is the best way to lower the total cost of digital fulfillment. -- COO John Mulligan

Target made efficient use of its 1,800 physical store locations. In fact, these spots handled six times the online sales volume than in last year's holiday season. Two thirds of Target's digital orders were delivered from a store rather than from a dedicated e-commerce fulfillment center.

Image source: Getty Images.

Management expects this sales channel to eventually grow to the point that it requires a bigger, dedicated infrastructure. But that's a problem for another day. For now, "we avoid spending all that capital on new facilities we'd really only need a few weeks out of the year," Mulligan explained.

Looking to 2018

Management affirmed their goal for modest sales growth in 2018 -- coupled with another year of heavy spending. Capital investments will top $3.5 billion, they said, as Target triples its pace of store remodels and opens more small-format shops while pouring resources into next-day and same day delivery services. Profitability should drop again, executives said, but not by as large of a margin as it did during 2017.

The long run

As we look past 2018, we don't believe that margin rates are going to unsustainably low levels, and we can clearly see a path to evolve our financial model and reward investors by delivering growth and attractive returns consistent with the long-term record of this great company. -- Smith

Target's shift toward online sales will likely lower its earning power over the long term even after these two years of elevated investments are behind it. Its capital-heavy approach should, management warns, result in "somewhat lower operating margins than we've seen historically."

The payoff should be healthy sales growth, though, which Cornell and his team believe will continue to support the key financial metrics that stood out in 2017, including surging free cash flow and impressive returns on invested capital.